How long will gold hold for?

Hedge funds cut bets on a gold rally for the first time in six weeks as prices snapped the longest stretch of gains since August 2011.

Money managers trimmed their net-long position by 8.5 percent in the week through July 15, U.S. government data show. Prices dropped 2 percent last week, the first loss since May and helping to erase $1.38 billion from the value of exchange-traded products backed by the metal.

Gold climbed 9.4 percent this year, outpacing gains for commodities, equities and Treasuries, partly as tensions between Ukraine and Russia increased demand for a haven. The rally is set to reverse as the economy improves and the Federal Reserve “eventually” increases U.S. interest rates, the World Bank said in a report July 17.

“We’ve probably already seen the extremes of positive sentiment in the gold market,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees $120 billion, said July 16. “We see the direction for gold is generally down, just because of the pace of economic growth improving. We see the Fed is going to actually start raising rates sooner than the market expects, probably sometime in the second quarter of next year.”

Futures fell 0.5 percent since the end of June to $1,315.50 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials dropped 3.9 percent, while the MSCI All-Country World Index of equities was little changed. The Bloomberg Treasury Bond Index gained 0.1 percent.

Short holdings

The net-long position in gold fell to 131,971 futures and options contracts as of July 15, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop surged 32 percent, the biggest gain in seven weeks.

While Fed Chair Janet Yellen has said she expects borrowing costs to remain low for a considerable time, analysts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. have brought forward estimates for when the central bank will boost rates. The Fed may have to raise rates more quickly than planned as unemployment falls and inflation quickens, James Bullard, president of the St. Louis Fed, said July 17. He doesn’t vote on monetary policy this year.

Bullion tumbled 28 percent in 2013, the most in three decades, as a stronger U.S. economy and the prospect of less monetary stimulus curbed demand for alternative assets. Payrolls rose in 33 states in June and the unemployment rate fell in 22, government data showed July 18. Prices will decline to an average $1,230 next year from $1,250 in 2014 and $1,411 in 2013, the World Bank estimates.

Jet crash

Investors are still adding to holdings through ETPs, as the assets increased for four straight weeks, the longest stretch since 2012. Some traders are seeking a hedge against escalating turmoil in Eastern Europe and the Middle East.

Gold futures on July 17 posted the biggest gain in four weeks, after 298 people were killed in a jet crash near the border between Ukraine and Russia. President Barack Obama said the next day the U.S. had concluded that a surface-to-air missile launched from insurgent-held territory in eastern Ukraine brought down the Malaysia Airlines jetliner.